Press Conference on World Economic Forecast

Press Conference on World Economic Forecast

27 May 2009

Press Conference

Department of Public Information • News and Media Division • New York

PRESS CONFERENCE on World Economic Forecast

The United Nations had downgraded its world economic forecast for 2009, Rob Vos, Director of the Development Policy and Analysis Division, Department of Economic and Social Affairs, told correspondents at a Headquarters press conference this morning.

Launching a midyear update to the World Economic Situation and Prospects report, he said that the world economy was expected to shrink by 2.6 per cent in 2009 ‑‑ down from a 0.5 per cent decline, which had been projected in an already pessimistic January forecast. In the world economic picture, there were very few indications of springtime “in this still very wintry landscape”.

On the positive side, he said that, should current policy measures take traction, a mild global growth of 1.6 per cent might by expected in 2010. A more pessimistic scenario pointed to the possibility of a more prolonged recession, with almost zero growth next year. Although unprecedented actions had been taken by Governments around the world, particularly the G-20, in terms of increasing available liquidity, promises for development assistance and other measures, more was needed to promote recovery that would be sustainable in the long run.

In a brief introduction to the report, Assistant Secretary-General Kwame Jomo, of the Department of Economic and Social Affairs, said that, for the first time, the document now included the projections of possible outcomes as a result of coordinated versus uncoordinated international microeconomic efforts to address the financial crisis. That was particularly important in view of the international community’s failure, so far, to act together. The report demonstrated that everybody stood to gain from greater international coordination. “The biggest gainers” would be the least developed countries. He also informed correspondents that, since the end of last year, a monthly update on the world economic situation and prospects was now available.

Providing highlights of the findings of the report, Ms. Vos said that not since the crisis of the 1930s had the global economy gone into a negative territory. The United States economy was expected to drop by 3.5 per cent in 2009; the economy of the European Union was likely to decline by 3.7 per cent; and the Japanese economy had been very hard hit by the decline in global trade, as well. A sharp deceleration from robust growth to strongly negative territories could also be seen in the countries with economies in transition, particularly the countries of the Commonwealth of Independent States, as well as in South-Eastern Europe.

Continuing, he expressed serious concern about an expected 11 per cent drop in world trade in 2009. While a slight recovery in world trade might be seen next year, it would be at much lower levels than in previous years. The crisis had originated in developed countries, but it was now evident that developing countries were disproportionately hit by the downturn. In total, about 60 developing countries, out of a total of a little over 100, would see negative capital growth rates in 2009.

Further, he said about 30 low-income countries were expected to deplete their reserves to a level that was less than three months of imports, which was considered to be absolutely critical for keeping production going. Liquidity constraints, the collapse in global trade and the reversal of capital flows was affecting many of the emerging markets and middle-income countries. Many of the smaller economies would be strongly affected by decreasing remittance flows, on which they were dependent.

The report predicted that the crisis would keep 12 million to 16 million more people in poverty in Africa and another 4 million in Latin America and the Caribbean. Gross domestic product (GDP) growth in Africa was expected to slow to 0.9 per cent, down from 4.9 per cent in 2008. South American economies were expected to shrink by almost 1 per cent on average, while Mexico and Central American economies were projected to fall by over 4 per cent. The setback would be felt in East and South Asia, with between 56 million and 80 million people likely to be affected, about half of them in India.

Among the dangers that could hamper possible recovery, he mentioned continued volatility in the exchange rates, the possibility of a steep drop of the United States dollar, the threat of deflation, capital reversals in emerging markets, weakened aid flows to low-income countries, and policy challenges. Unprecedented steps had been taken, including monetary, financial and fiscal measures, to stabilize the markets and revive global growth, but, at present, the stimulus was very unbalanced, with 80 per cent of its measures concentrated in developed countries. The report made a case for a more balanced and coordinated approach over the next four or five years, which could lead to an annual global growth rate of 4 to 5 per cent in 2010-2015.

Responding to a question about the impact of United States and China fiscal policies on the developing world, Mr. Vos said that, as highlighted in the report, not a single individual country could solve the world’s economic problems on its own. Rather, concerted global action was needed. Among the requirements, he mentioned true delivery on official development assistance (ODA) commitments made and the need to ensure sufficient resource flow to developing countries, which would allow them to introduce fiscal stimuli and increase social protection for the population. At the same time, policy action to ensure a balanced response would be needed in China and elsewhere, of course.

In response to several questions, he emphasized the importance of policy coordination and coherence in all areas, stressing the need to coordinate the timing and size of fiscal stimuli, possible agreements on the exchange rates and reform of the international monetary system.

Mr. Jomo added that there was “a huge number of problems that can only be resolved through more effective coordination”. The Group of Seven (G-7) had been found wanting, and the International Monetary Fund (IMF) was not in a position to provide the kind of leadership that was desperately needed. Without a coordinated approach, some countries might not be willing to introduce stimulus measures, because others were not doing it. Among other things, it was important to address the strong divide that existed. Countries separated by the Atlantic are also separated by opinion and policy over whether strong fiscal stimulus measures were needed. Due to the threats of inflation and deflation, there were also strong arguments against monetary easing and other efforts on the monetary side.

Another issue related to the sustainability of stimulus measures, with some people placing emphasis on the need to return to fiscal balances as soon as recovery started. It was important to work out a right approach, in that regard. For example, at the beginning of his second term, in 1937, United States President Franklin Roosevelt had tried to balance the budget. As a result, during the rest of the 1930s there was no strong recovery.

To questions regarding the proposal to establish a global economic council, he said that, with the crisis presenting a threat to the whole world economy, there was a shared sense that a much more inclusive and representative leadership was needed that was accountable to the multilateral system. Such a body would provide a greater degree of coordination. Among other things, it had been suggested that the global economic council should be looking at the entire multilateral system, including the United Nations and Bretton Woods institutions, providing coordination at that level.

It was up to Member States to make a decision on the proposal, he continued. The implications were quite serious, and some changes to the Charter would be needed to set up such a body. Among other things, it was important to clearly define the role of a possible new organ in relation to the General Assembly, the Economic and Social Council and the Security Council.

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For information media • not an official record

For information media. Not an official record.

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